Retail, conferences and Obamacare — 5 things to watch for this week

If you love shopping and fashion, this week has plenty of news for you. A slew of retail companies will report earnings and two big fashion shows in Milan and Paris will. If that isn’t enough, the Supreme Court will hear arguments about a case involving Obamacare.

Here’s what you need to know for the week ahead.

1. Retail earnings abound

Abercrombie & Fitch ANF, which saw its embattled CEO Michael Jeffries retire at the end of 2014, will report its earnings Wednesday morning. For better or worse, this retailer is never dull. Your pets also have some earnings to look forward to Wednesday with PetSmart reporting PETM. Foot Locker FL and Staples SPLS report Friday morning.

2. Speaking of retail

There are sure to be headlines coming out of the twin Fashion Weeks taking place in the fashion capitals of Milan and Paris. Earlier this month, New York City held a Fashion Week that was said to have generated a huge amount of money for the city. The report, U.S. Rep. Carolyn B. Maloney, D-N.Y., the event generates more revenue for the city ($900 million) than the Super Bowl generated for New Jersey last year ($550 million).

3. February jobs report

Another month, another jobs report. This next one could show continued growth after a strong January report. Employers added 257,000 jobs in January. That signaled the 52nd straight month of employment gains. For more, check out Fortune’swrite-up at the time.

4. A confluence of conferences

It’s a huge week for conferences. For starters, the Game Developers Conference, a must-attend event for anyone in the video game industry, kicks off in San Francisco on Monday. Simon Carless, the executive vice president for the conference, told an ABC affiliate that virtual reality and the rise of indie game makers are two trends to pay attention to at the conference. Other events taking place include the Morgan Stanley’s Technology, Media and Telecom Conference (for more, check here) and the Mobile World Congress for mobile devices, which starts Monday in Barcelona.

5. Obamacare case goes to SCOTUS

On Wednesday, the Supreme Court will hear King v. Burwell, which has the potential to shutter Obamacare subsidies in 34 states that use Healthcare.gov, according to Politico. A ruling against the subsidies would go a long way to dismantling President Obama’s Affordable Care Act. There are 11.4 million people who are currently signed up for health insurance through the health care law.

Here’s the major obstacle Tinder still faces

Bad news for all you left-swiping investors out there: Morgan Stanley analysts aren’t so hot on Tinder’s ability to make money by charging users for a premium version of its wildly popular dating app.

“We see Tinder monetization underwhelming investors, and not ramping fast enough to offset the core dating deterioration,” reads an analyst note about Tinder parent company IAC. Why the negativity? While the Morgan Stanley team acknowledged Tinder’s massive user growth, it also noted that lots of Tinder’s users are young—and young people, the report argues, won’t pay to date.

The analysts also believe that another IAC dating service, Match.com, will also suffer, seeing growth slow between 3% to 8%.

The Morgan Stanley report could throw some cold water on Tinder’s fire after Barclays analysts said the app could be worth as much as $1 billion by the end of 2015 thanks to surging user growth.

Morgan Stanley MS aid it will pay $2.6 billion to the U.S. Department of Justice and United States Attorney’s Office for the Northern District of California to resolve potential claims stemming from sale of mortgage bonds before the financial crisis.

Morgan Stanley also increased its legal reserves by about $2.8 billion, the bank said in a regulatory filing.

Revenue from the bank’s increasingly important wealth management business rose 2.4% to $3.80 billion as equity markets boomed. Overall, earnings attributable to common shareholders rose to $920 million, or 47 cents per share, in the fourth quarter from $36 million, or 2 cents per share, a year earlier, the report said. Legal expenses fell to $284 million from $1.4 billion.

Financial crisis: Revisiting the banking rules that died by a thousand small cuts

Many have bemoaned the U.S. government’s failure to do more to strengthen the financial system following the 2008-2009 crisis. In particular, Congress has not considered anything resembling a revival of the Glass-Steagall Act, which separated the humdrum deposit-taking function of commercial banks from the kind of dubious investment and trading activities that set up financial institutions for a fall.

In fact, Congress recently weakened The Volcker Rule, which aimed to prohibit some forms of risky trading by banks. And now the Republican-controlled House and Senate vow to further roll back the Volcker Rule and other provisions of the Dodd-Frank financial reform.

All this makes it important to get the history, and specifically the history of Glass-Steagall, right. First put in place in response to the financial crises of the Great Depression, the Glass-Steagall Act was allowed to lapse in 1999. Many critics of that move argue that it enabled the orgy of financial risk-taking that followed. Others counter that the increased risk-taking was not coming from commercial banks freed up by the elimination of Glass Steagall but by the shadow banking system of investment firms, hedge funds, and commercial paper dealers that were never restricted by Glass Steagall in the first place.

In fact, the financial crisis of the late 2000s was not brought on by the lack of Glass-Steagall per se but instead by a whole set of measures that loosened regulation. The end of Glass-Steagall was simply emblematic of that process.

It all started in 1980 with the abolition of Regulation Q ceilings on deposit interest rates, which allowed commercial banks to compete more aggressively for deposits. That led to a cascade of unintended consequences. It intensified the pressure on Savings & Loans, which previously had been permitted to offer higher deposit rates than other financial institutions. To limit the damage, the Garn-St. Germain Act of 1982 allowed S&Ls to engage in a range of commercial banking activities, those related to consumer lending for example.

Garn-St. Germain helped set the stage for the S&L crisis because it allowed thrifts to take on additional risk but didn’t do anything to restrain them. Meanwhile, as the thrifts began to offer more financial services to customers, traditional banks began to feel competitive pressure. Commercial banks had long been frustrated by their inability to underwrite corporate and municipal bonds. So, in response to a petition from J.P. MorganJPM, Bankers Trust, and Citicorp, the Federal Reserve creatively reinterpreted Glass-Steagall in December 1986 to allow commercial banks to derive up to 5% of their income from investment banking activities, including underwriting municipal bonds, commercial paper, and, fatefully, mortgage-backed securities.

In 1987, over the opposition of Fed Chair Paul Volcker, the Federal Reserve Board authorized several large banks to further expand their underwriting businesses. Under Volcker’s successor, Alan Greenspan, the Fed then allowed bank holding companies to derive as much as 25% of their revenues from investment banking operations.

The pressure to loosen regulation intensified as a merger wave swept through the world of investment banking and brokerage firms in the 1990s. Investment banks had first been allowed to expand when, in 1970, the ban on publicly listing their shares was lifted. The response took time to gather steam, but they now expanded with a vengeance.

In 1997, Morgan Stanley MS, an investment bank, merged with Dean, Witter, Discover & Co., a brokerage and credit card company. That same year, the trust company and derivatives house Bankers Trust acquired Alex. Brown & Sons, an investment and brokerage firm. The consolidation of investment houses, brokers, and insurance companies threatened to put banks at an even bigger disadvantage. So, the banks responded by lobbying even more intensely for the removal of the remaining restrictions on their operations.

By the 1990s, then, the Glass-Steagall Act was already significantly weakened. The fatal blow was struck in 1998 when Citicorp moved to purchase Travelers Insurance Group, notwithstanding Glass-Steagall’s requirement that it sell off Travelers’ insurance business within two years. The merger allowed Travelers to market insurance and its in-house money funds to Citicorp’s retail banking customers. And it gave Citicorp access to an expanded clientele of investors and insurance policyholders. Its main shortcoming? It was not compatible with Glass-Steagall.

The chairmen and co-CEOs of the merged company, John Reed and Sandy Weill, mounted a furious campaign to remove Glass-Steagall’s nettlesome restrictions before the two-year window closed. Their arguments received a sympathetic hearing from Alan Greenspan’s Fed, the Clinton White House, and the Treasury Department, especially when Lawrence Summers succeeded Robert Rubin as secretary in mid-1999. And the executives were warmly received in the halls of Congress, where bank lobbyists freely roamed.

Glass-Steagall was finally euthanized by the Gramm-Leach-Bliley Act, which repealed residual restrictions on combining commercial banking, investment banking, and insurance underwriting businesses in November 1999.

It would be all too easy to claim that Glass-Steagall’s death was a singular event that caused the financial crisis. In fact, its demise was the culmination of a decades-long process of financial deregulation in which both commercial banks and shadow banks were permitted to engage in a wider range of activities, while supervision and oversight lagged behind. Competition between commercial banks, investment banks, and shadow banks squeezed the profits of all involved. Many of the affected institutions responded by using more borrowed money and assuming more risk. The consequences, we now know, were disastrous.

The fact that much of the risky business that led to the 2008-2009 crisis was performed by shadow banks that had always operated outside the Glass-Steagall ring-fence does not excuse the ongoing relaxation of financial oversight and regulation. But simply putting Glass-Steagall back in place will not protect us from future crises. Re-regulating only part of the financial system will not be enough.

We need comprehensive financial reform to cope with 21st century financial markets. From this point of view, eviscerating the Dodd-Frank Wall Street Reform and Consumer Protection Act, as some in the recently inaugurated Congress propose, would be a step in precisely the wrong direction.

JPMorgan settles currency manipulation lawsuit in U.S.

(REUTERS) – JPMorgan Chase & Co has become the first bank to settle a U.S. antitrust lawsuit in which investors accused 12 major banks of rigging prices in the $5 trillion-a-day foreign exchange market.

The largest U.S. bank will pay about $100 million, a person familiar with the matter said. Lawyers for the bank and the investors said a settlement had been reached in a letter filed on Monday with the U.S. District Court in Manhattan.

JPMorgan settled after mediation with Kenneth Feinberg, who also oversees a General Motors program to compensate drivers whose vehicles had faulty ignition switches.

Monday’s settlement requires court approval, and settlement papers are expected to be filed with the court this month.

The 2013 lawsuit is separate from criminal and civil probes worldwide into whether banks rigged currency rates to boost profit at the expense of customers and investors.

JPMorgan JPM agreed in November to pay roughly $1.01 billion to resolve such probes by U.S. and European regulators. Five other banks settled for an additional $3.3 billion.

In their complaint, investors including the city of Philadelphia, hedge funds and public pension funds accused the 12 banks of having conspired since January 2003 in chat rooms, instant messages and emails to manipulate the WM/Reuters Closing Spot Rates.

They said traders would use such names as The Cartel, The Bandits’ Club and The Mafia to swap confidential orders, and set prices through manipulative tactics such as “front running,” “banging the close” and “painting the screen.”

According to the lawsuit, the 12 banks held an 84 percent global market share in currency trading, and were counterparties in 98 percent of U.S. spot volume.

“The settlement is a responsible step by Chase in addressing its involvement,” Michael Hausfeld, a lawyer for the investors, said in a phone interview. “It is a beginning with respect to the accountability of other banks engaged in the same trading.”

JPMorgan declined to comment. The other 11 banks declined to comment or did not respond to requests for comment. Bank of America, Citigroup, HSBC, RBS and UBS also settled with regulators in November.

Morgan Stanley fires an employee for stealing client data

Morgan Stanley said Monday it has fired an employee who allegedly stole some of the bank’s wealth management client data, a theft that affected up to 10% of those clients.

“While there is no evidence of any economic loss to any client, it has been determined that certain account information of approximately 900 clients, including account names and numbers, was briefly posted on the Internet,” Morgan Stanley MS said in a statement. Bloomberg, meanwhile, reports that as many a 350,000 wealth-management clients could have had their data stolen.

The bank said it detected the exposure of the data and the information was “promptly removed.” The unnamed employee has been terminated, and Morgan Stanley said it advised law enforcement and regulatory authorities about the incident.

The private information that was stolen didn’t include account passwords or social security numbers, the bank said. Morgan Stanley is also in the process of reaching out to all potentially affected clients.

Wealth management is a big business for Morgan Stanley, generating over $14 billion in net revenue in 2013 and nearly $1.5 billion in income from continuing operations. The business had $1.9 trillion in client assets at the end of 2013, and was served by a network of more than 16,700 global representatives according to Morgan Stanley’s latest annual SEC filing.

Rosneft expansion thwarted by U.S. veto on Morgan Stanley deal

The ambitions of Kremlin-controlled oil champion Rosneft to boost its global reach have been reined in by U.S. authorities, which torpedoed its acquisition of a Morgan Stanley oil trading business.

Rosneft, headed by Igor Sechin, a long-standing ally of Russian President Vladimir Putin, said on Monday that the deal was terminated because of the refusal by U.S. regulators to grant clearance.

“Having invested substantial efforts in the deal, the parties regret that it could not be completed,” said Rosneft, in which BP holds a 20 percent stake.

Morgan Stanley also said that the deal was terminated and that it will now consider a variety of options.

The collapse of the deal, valued by sources at between $300 million and $400 million, is yet another blow for Rosneft after its partners, including ExxonMobil, withdrew from projects to develop Arctic offshore oil deposits following the introduction of Western sanctions over the Ukraine crisis.

The Morgan Stanley deal was agreed in December 2013, when Sechin said that it would spearhead the company’s growth in the international oil and products markets.

Since then, however, the West’s sanctions and a plummeting oil price has prompted Rosneft to seek state support from Russia’s National Wealth Fund (NWF).

The strained relations with the West have already forced German chemicals group BASF and Russia’s Gazprom to halt a gas assets swap planned for this year.

Sources told Reuters in September that Rosneft might abandon the Morgan Stanley deal because sanctions had hurt its ability to finance the operations.

The fall in its share price and the rouble’s collapse have left Rosneft with a market capitalisation of $31 billion, against $45 billion of debt that was mainly incurred with last year’s purchase of oil producer TNK-BP.

Rosneft shares rose as much as 7 percent in Moscow trading, with investors encouraged by the end of the company’s spending spree. The shares finished the day with a gain of 2.5 percent, against a 0.8 percent decline for the broader market.

“Of course, it’s not bad that Rosneft has stopped, at least here. If one has to buy something in such a difficult situation, one would not only have to ask for help from NWF but also from the riches of the entire motherland,” Kapital portfolio manager Vadim Bit-Avragim said.

Earlier in the day, the company said it had met a $7 billion loan repayment, partially easing fears among investors that Western sanctions could prompt mass defaults.

The rise of rich man’s subprime

Lindsay (we’ll call her Lindsay to protect her identity) took a job in the securities-based lending department at Morgan Stanley right after college graduation. She had dozens of colleagues in her group when she first started and now she’s got hundreds, nearly all of them entry-level workers looking to get their foot in the industry.

They are there to support the brokers—ahem, financial advisors—as they turn as many of their clients’ investment portfolios into loan collateral as possible. Processing paperwork and assisting the firm’s wealth-managers-turned-loan-officers is their business—and business is booming.

Securities-based lending, also known as non-purpose lending, is Wall Street’s hottest business. From UBS to Bank of America Merrill Lynch to JPMorgan, high net worth investors are being enticed to take out loans against their brokerage accounts at a blistering pace. A May 2014 article in The Wall Street Journal told the story of Jason Katz, a UBS broker who has arranged portfolio loans for 21 of his clients in the prior year, a four-fold jump from the year before. The Journal reported that portfolio lending jumped by 28% at UBS between 2011 and 2013.

A contact of mine at Wells Fargo Advisors (formerly Wachovia / AG Edwards) told me they refer to these loans as their “13th month”—a reference to the 12 production months each broker has in the course of a year to generate revenues. Another friend of mine at Morgan Stanley told me that, were it up to his regional manager, they would be automatically sending out the paperwork for these loans with every single new account form. It’s worth noting that Morgan is actually behind many of its competitors in this space. According to Reuters, “For every dollar of client deposits, Morgan Stanley makes just 55 cents of loans, far less than the 70 to 80 cents that rival banks make in their brokerage businesses. Its profit margins are weaker than other major brokerages.”

If you know anything about Wall Street culture, then you already know that the competitive nature of the game will always drive a trend like this way past the bounds of logic and reason. You also know that compensation incentives will always get the job done. In fact, to spur even more portfolio lending, this December, Morgan instituted a new bonus system for 2014 in which “advisers can earn up to $202,500 for loan growth, up from $127,500 in 2013.” In a presentation last September, the firm’s CFO Ruth Porat mentioned a goal to triple the firm’s portfolio loan accounts from 2012 levels by 2015. By all accounts, they’re well on their way.

The mechanics of securities-based lending are extraordinarily simple, especially compared to almost everything else that transpires in the financial services industry. Wealth management clients of the wirehouse firms keep millions of dollars in their taxable brokerage accounts, predominantly invested in stocks, bonds, and mutual funds. Advisors at the firm are encouraged to convince their clients to borrow against these holdings. Clients are offered an ultra-low interest rate, typically between 2% and 5%. And they can borrow between 50% and 95% of their portfolio’s equity (cash) value, with the bond-equity mix of the account being the primary determinant of the loan’s size.

The only rule is that clients cannot use the loaned funds to purchase additional securities, like a margin loan. Instead, these borrowings are meant to allow clients to smooth out cash flow at a small business, fund the purchase of artwork and real estate, or refinance higher-rate loans like mortgages. The beauty of securities-based lending is that these are not underwritten loans nor do they require extensive due diligence because the assets are already sitting there at the firm and public securities are thought to be extremely liquid. Also, these loans can be arranged with minimal paperwork. Lindsay at Morgan Stanley informs me that they can typically be turned around, from request to dispersal of funds, within 36 hours. In the span of a week, borrowers can buy a boat backed by a portfolio of bonds without a single transaction taking place.

An accidental product of Dodd-Frank?

While portfolio-based lending is not a new business, it has become newly explosive as a product on Wall Street. It’s even gotten to the point where many employees of banks now include the term “Private Client Banking” on their business cards, where once the title of Vice President of Investments would have been.

With so much of The Street’s bread and butter businesses—banking, hedge funding, and prop trading—in jeopardy on the heels of financial reform efforts like Dodd-Frank, a renewed push into wealth management lending became an obvious move. As a result, while leverage and risk in the financial system has decreased, it has also shifted from the balance sheets of the banks to the account holders themselves. A July 2014 article published by Investment News documented a 32% rise in Morgan Stanley’s client liabilities, to a record $45 billion, from the same period a year before.

Should market volatility result in a capital call, securities held directly by wealth management customers can be liquidated instantly with very little risk to the brokerages who’ve extended the credit. In essence, we’re seeing re-leveraging amongst the 10% of America that owns 80% of the stock market, while the other 90% of the country has been forced to deleverage in recent years.

The popularity of these loans and the ease in which they can be manufactured has created a huge profitability boost for the Morgans and Merrills. It’s also had some other, less obvious benefits for the firms that have focused on it. For example, clients with outstanding loans tied to their portfolios tend to stay put. This has made wealth management assets much stickier and less prone to departing for an independent RIA firm or a rival wirehouse. Sticky assets mean a lot of visibility to analysts, who often assign a higher multiple to businesses with higher visibility. This is why asset management profits are more highly prized than trading profits when companies like Goldman and JPMorgan are analyzed by the sell-side.

Securities-based lending has also filled the gaping hole in the revenue mix where commission-based stock trading once was. Merrill Lynch has recently told analysts that approximately 50% of its brokers have 50% of their client assets in non-transactional, fee-based accounts. Now that wirehouses have shifted their brokers’ business models away from trading commissions and selling concessions, something had to take its place. Insurance did the trick for awhile, as did credit cards and mortgages. But still, the funds sitting in mutual funds and Treasurys being managed in wrap accounts for less than 2% looked ripe for some sort of profitability enhancement. By leaving those portfolios intact but layering an additional stream of revenues onto the same assets, the wirehouse advisors found the proverbial “second bite of the apple.”

Glossy brochures implore clients to “unlock the value of your portfolio through a strategic approach that addresses both sides of your balance sheet” and “maximize the liquidity solutions available to you.” This is code for Hey, here’s a way you can have your cake and eat it too! Retail investors are being shown a way to continue to ride the markets higher while increasing their spending power. A big part of the pitch is that clients incur no taxable consequences from the sale of any securities and they also won’t miss out on any additional upside.

Defenders of the securities-based lending boom point out that wealthy people have always borrowed against their assets and that ultra-low rates make such offerings a logical option, especially compared to second-lien mortgages or credit card debt. And this is true. The bigger question revolves around whether a true financial advisor (read: a fiduciary) would really be recommending that their clients put retirement assets up as collateral for increased consumption in the first place. Can you really be giving quality advice while tacitly facilitating the purchase of luxury goods or other forms of consumption using additional debt?

Skeptics from the independent side of the wealth management industry would ask, rhetorically, whether or not most of these loans would be made with such frequency if the advisors themselves were not sharing in the fees. The answer is that, no, of course they wouldn’t.

Fiduciary advisors off Wall Street shudder when a prospective client mentions that his or her portfolio assets are 50% levered to a vacation home loan. An RIA friend of mine from the New Orleans area was asked by a client to match one of these wirehouse loans in order to take over the client’s investment accounts. She reluctantly made some calls to her custodian and a third-party lender to see what could be done. “I was actually relieved when it turned out that I couldn’t take on the client’s accounts and match the loan. I could do without bringing that kind of additional stress and aggravation into my practice.”

How this could get ugly

Now, you may be saying to yourself, “So what, a bunch of rich guys are getting in over their heads again, what else is new?” You may be wondering why this should be of any concern to the rest of us, who are going about our investing and way of life in a responsible manner. Fair question.

I would point out the striking similarities between the current spate of leveraging assets with the type of behavior that led to the most recent financial crisis. Consider:

Once again, the biggest banks on Wall Street are acting as the fulcrum for this leverage, connecting debt funding with investors of dubious levels of sophistication (anyone who believes that wealthy people are automatically savvy hasn’t spent much time around them).

Once again, a seemingly unencumbered source of instant cash (read: free money) has been streamlined, productized, turned into a conveyor belt-esque enterprise, and marketed to a mass audience. Morgan Stanley’s version is actually called Express CreditLine.

Once again, super-cheap financing based on an asset whose value can fluctuate wildly (a stock and bond portfolio in this case) is being used for the purchase of assets that can be significantly less liquid, like real estate, fine art, or business expansion.

Once again, investors are being goaded into a seemingly consequence-free transaction in which they’re being counseled to seek instant gratification.

If you think the seven-year bull market in stocks along with the endless bid in bonds has little to do with this trend, you’ve not been paying attention. The parallels between the new securities-based lending bubble and the subprime lending bubble are obvious. Substitute the notion that housing prices will always go up with financial assets and it’s clear that the same rationale is driving this scheme.

You could argue that the major difference between this credit boom and the last one is that subprime borrowers could not afford the housing loans to begin with, whereas high net worth investors already have the means to pay these loans back in the form of their investment accounts. Sure, today they do.

But are future stock and bond gains assured? Is the historic lack of volatility of today’s markets a permanent feature of the investment landscape or a temporary anomaly? If the Fed-induced stability we’ve enjoyed for three-quarters of a decade now should give way to another environment altogether, then what happens?

And if all of these leveraged “investors” are forced to sell at once, what will happen to the markets for everyone else? The mass-adoption of so-called “portfolio insurance,” a popular options-related strategy, taught us a nasty lesson in 1987. Then, like now, investors believed that they could be in the market without the risk that actually comes from being, well, in the market. It didn’t work out very well for the rest of us when these options trades created a cascade that left stocks 23% less valuable in the course of a single day.

I know, it’s hard to imagine right now, but at a certain point, the markets are going to move in the other direction. Are the bond funds and stock ETFs that everyone’s borrowing against equipped to handle a scenario in which wirehouse bankers begin demanding liquidation for millions in portfolio loan accounts at once? What about billions? Hedge fund prime brokers are fairly adept at working with margin clerks in times of excess volatility, but are Merrill Lynch financial advisors similarly capable?

Unfortunately, we may be forced to find out the hard way, as the securities-based lending rush continues. This is to say nothing of the dashed hopes for retirement when the piper comes calling for his pay at the worst possible time, during a bear market or a major correction.

Why Elizabeth Warren is wrong about Wall Street insiders

Twice last month, U.S. Sen. Elizabeth Warren (D-MA) called for the White House to back away from, or rule out considering, nominating Wall Street insiders for senior regulatory positions. If this is the start of a crusade, it’s a very bad idea.

The greatest challenge facing financial regulators is the mind-numbing complexity of financial instruments. One big reason Wall Street has gotten away with so many shenanigans is that too few regulators understand what banks are up to.

Although the public hears a lot about the revolving door between Wall Street and Washington—and though it surely poses concerns—the senior positions at the top regulatory institutions are filled with people from public service backgrounds, with academics, and with economists who, in their prior jobs, were not primarily engaged in trading, or reading balance sheets, or evaluating financial risks.

And for the most part, when Wall Street was piling into mortgage securities, these regulators did not understand the risks. They may not understand the next time either.

If Washington is going to be effective at policing Wall Street, it needs to understand what Wall Street does. Franklin D. Roosevelt appreciated this—in a far less complex age—when he nominated Joseph P. Kennedy, a one-time stock market “pool” operator (basically a manipulator) to be the first chairman of the Securities and Exchange Commission. Blunting criticism that he was putting a fox in charge of the henhouse, FDR reportedly said, “set a thief to catch a thief.” Kennedy got the message. He was a resolute chairman and established a solid reputation for the SEC that endured for decades.

Kennedy was not an aberration. His most illustrious successor may have been Arthur Levitt, a one-time stockbroker and stock exchange chairman who was wise to the canny ways of his profession. Levitt sniffed out the simmering potential for conflicts of interest between auditors and public companies—though Congress wouldn’t listen—and was ultimately proven right by the 2002 Arthur Andersen scandal.

By contrast, Christopher Cox, a lawyer and later a congressman, was an ineffective SEC chair. He was blindsided by the 2007 mortgage crisis and it was under his watch that the agency missed the Bernie Madoff scandal. One of the toughest regulators was Nicholas Brady, the head of a presidential commission and soon to be Secretary of Treasury, who courageously identified “portfolio insurance,” then a hot Wall Street product, for stoking the panic in the 1987 stock market crash. Also at the Treasury, I would argue that Hank Paulson, formerly head of Goldman Sachs GS, responded swiftly and effectively to the 2008 meltdown; he was more forceful than either of his two immediate predecessors, who hailed from the aluminum and railroad industries.

Perhaps a couple of practiced lenders would have been useful at the Federal Reserve—which utterly failed to appreciate the risks in the sub-prime mortgage bubble. Indeed, it seems incredible that during the run-up to the mortgage crisis, among the Fed’s seven governors, only one had a background in private sector banking. (Another, Keven Warsh, had worked at Morgan Stanley MS, but by the time he joined the Board the bubble was ready to burst.)

This is not to urge a blanket ban on industry outsiders. The lone Fed governor who sounded early alarms about the mortgage crisis was Edward Gramlich, a former economics professor. Nor is it to suggest (obviously) that bankers never get it wrong. But finance cannot be regulated without expertise. To blackball professionals seems dangerously naïve. We should not forget that Paul Volcker, one of the best, and an impeccably ethical, Fed chief, was groomed at Chase Manhattan Bank.

Warren is fighting to block Antonio F. Weiss, who has been nominated by President Obama to be the next Treasury under secretary for domestic finance. Though an important post, it’s an obscure one to be the focus of a Congressional intervention—especially from a Senator of the President’s own party. But Warren has made clear that one of her main objections is that Weiss works at Lazard, a Wall Street investment bank. She wrote in the Huffington Post that Obama should “loosen the hold that Wall Street banks have over economic policy-making.”

That article followed closely a Wall Street Journalop-ed, in which Warren and a fellow Democratic Senator called on President Obama to “move in a new direction” by filling the two vacancies on the Federal Reserve Board with nominees who will “look out for Main Street, not the big banks.”

To maintain, as Warren did, that Wall Street has a “hold” over the Treasury is a curious reading of recent history. Of the eight U.S. Treasury secretaries since the beginning of the Clinton Administration, only three have come from Wall Street.

And if Warren thinks nominating Fed governors sensitive to Main Street represents a “new direction,” she is dead wrong. Only one of the five Fed governors worked as private sector bankers. All of the rest are from public service or academia. Even among the Federal Reserve Banks, the level at which most of the supervision occurs, only three of the 12 have presidents who worked in private sector finance.

Given Warren’s objections, it’s perhaps surprising that, last year, she voted to approve Jack Lew as Treasury Secretary (Lew was at Citigroup C when the bank collapsed and required a bailout). But that’s the point: Wall Street-ers should be evaluated on their merits, just like others. Wall Street experience is certainly not a qualification in itself—nominees must demonstrate that they can separate from their employers, intellectually as well as financially. But nor should it be a disqualification. It wouldn’t hurt to have a few foxes on the lookout.

Roger Lowenstein is the author, most recently, of The End of Wall Street. He is writing a book on the origins of the U.S. Federal Reserve.

Correction: An earlier version of this article misstated that none of the five U.S. Fed governors worked as private sector bankers. Jerome H. Powell was a partner at The Carlyle Group from 1997 to 2005.